How To Choose a Life Insurance Beneficiary [2024]
You should always choose your beneficiary carefully, considering they will be the one responsible for finances. Our experts explain why you need a designated beneficiary and key factors to consider, including a primary or contingent beneficiary and a per capita or per stirpes payout.
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Chris Abrams
Licensed Life Insurance Agent
Chris is the founder of Abrams Insurance Solutions and Marcan Insurance, which provide personal financial analysis and planning services for families and small businesses across the U.S. His companies represent nearly 100 of the top-rated insurance companies. Chris has been a licensed life and health insurance agent since 2009 and has active insurance licenses in all 50 U.S. states and D.C. Chr...
Licensed Life Insurance Agent
UPDATED: Mar 6, 2024
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Advertiser Disclosure: We strive to help you make confident life insurance decisions. Comparison shopping should be easy. We are not affiliated with any one life insurance company and cannot guarantee quotes from any single company.
Our life insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different life insurance companies please enter your ZIP code above to use the free quote tool. The more quotes you compare, the more chances to save.
Editorial Guidelines: We are a free online resource for anyone interested in learning more about life insurance. Our goal is to be an objective, third-party resource for everything life insurance-related. We update our site regularly, and all content is reviewed by life insurance experts.
UPDATED: Mar 6, 2024
It’s all about you. We want to help you make the right life insurance coverage choices.
Advertiser Disclosure: We strive to help you make confident life insurance decisions. Comparison shopping should be easy. We are not affiliated with any one life insurance company and cannot guarantee quotes from any single company.
Our life insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different life insurance companies please enter your ZIP code above to use the free quote tool. The more quotes you compare, the more chances to save.
On This Page
- A beneficiary is a person or entity that receives the death benefit from a life insurance policy
- You should choose your beneficiary carefully, considering their financial capabilities and ability to receive and manage the death benefit
- It’s important to review and update your designated beneficiary regularly, as your life circumstances and relationships may change over time
Choosing a life insurance policy beneficiary can be a difficult decision. Still, it is a crucial step in ensuring that your loved ones are taken care of after your passing.
A beneficiary is a person or entity designated to receive the death benefit from a life insurance policy. Therefore, it’s important to consider who will depend on your income and how and when you want them to receive the benefits.
So how do beneficiaries work? Continue reading for tips on choosing a beneficiary and what to consider during the decision-making process when choosing from the different types of life insurance.
- Life Insurance Beneficiaries
What is an insurance beneficiary?
A beneficiary is an entity or person that will receive money or other benefits from your insurance policy or retirement plan after your death. You can name more than one beneficiary, known as a contingent beneficiary.
The beneficiary can be:
- A family member
- Friend
- Charity
- Your estate
When the insured person dies, the beneficiary must provide proof of death to the insurance company or plan administrator to receive any benefits. When you consider how much life insurance you need, you can review recent end-of-life care costs and statistics.
If you name an estate as the beneficiary of your life insurance, the death benefit will go through probate and may be subject to taxes before it can go to your heirs. Therefore, it’s important to consider who will depend on your income and choose a beneficiary who can use the funds as you intend. You can read more about “Does life insurance go through probate?” in this article.
Primary vs. Contingent Beneficiary
There are two types of life insurance beneficiaries:
- Primary Beneficiary. The primary beneficiary is the first person or entity to receive the death benefit from the policy. You can have multiple primary beneficiaries.
- Contingent Beneficiary. The contingent beneficiary will only receive the death benefit if the primary beneficiary is unable or unwilling to accept it.
When you designate a contingent or life insurance secondary beneficiary, they will inherit your death benefits in the event your primary beneficiary passes away before you do.
For example, you may choose your spouse as the primary beneficiary and your children as the contingent beneficiaries. If something were to happen to your spouse, the death benefit would go to your children.
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Who can be a life insurance beneficiary?
You can name almost anyone as a life insurance beneficiary, including family members, friends, business partners, or even your estate. It is important to consider their age, financial stability, and ability to properly manage the funds before naming them as a beneficiary.
However, You can’t name your pet as your insurance beneficiary because pets are considered property and not legal entities capable of owning or managing assets.
Insurance beneficiaries must be individuals or organizations with legal standing to receive and manage the proceeds.
Read More: Why You Can’t Name Your Pet as Your Life Insurance Beneficiary
How to Choose a Life Insurance Beneficiary
Choosing a life insurance beneficiary is a personal decision, but there are some general things to keep in mind. You will want to choose someone financially responsible and use the money wisely. Consider choosing someone younger than you so that they can benefit from the money for a longer period of time.
Another thing to consider is whether you want to name more than one beneficiary. You may want to do this if you have children who are still minors or from a previous marriage. By naming more than one beneficiary, you can ensure that the money will be used as you intended.
It’s helpful to understand life insurance for same-sex couples if that applies to you. You will also need to decide whether you want your beneficiaries to receive the death benefit all at once or in installments. Again, you should discuss this with your beneficiaries, so they know your wishes and can make financial plans accordingly.
Once you have considered all these factors, you will be ready to choose your life insurance beneficiary. This is an important decision, so take your time and ensure you are comfortable with your choice.
Designating a Beneficiary
Your first step when getting life insurance is to designate a beneficiary. Choosing someone you trust is crucial because they’ll be responsible for handling the money.
When naming a beneficiary, you have two choices:
- Revocable Beneficiary. You are free to change who your beneficiary is at any time during the policy’s term.
- Irrevocable Beneficiary. You cannot change the beneficiary without their consent. Also, you must notify them if you cancel the policy.
Your beneficiary doesn’t need to be a family member. You can choose anyone you like, as long as they meet the requirements set by your life insurance company. So, take some time to think about this critical decision, and talk to your loved ones about who you want to receive the payout if something happens to you.
Be specific when designating a beneficiary. Include their full legal name, contact information, and relationship to you. The more information you provide, the easier it is for your insurance company to identify and properly distribute the funds to the correct person.
It’s important to note that some insurers will not allow you to directly name a child as a beneficiary if they are under 18 years old. However, in these cases, you can name their legal guardian as the beneficiary. Read more in this article, “What if I want my child as the beneficiary of life insurance” to learn more.
The Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) allows you to name a custodian for a minor’s financial assets, including life insurance proceeds.
Deciding How the Death Benefit Will Be Paid
When you buy life insurance, you also have to consider how the insurance company will distribute the payout to your beneficiary.
There are two main options:
- Per capita
- Per stirpes
Per capita distribution divides the death benefit equally among your surviving beneficiaries. For example, if you have four children and name them beneficiaries, each would receive 25% of the death benefit.
Per capita is the simplest option and can be a good choice if all your beneficiaries are adults capable of managing their finances.
With per stirpes distribution, the death benefit is divided among branches of your family. So, if you have three children and one predeceases you, their portion of the death benefit would go to their children instead.
Ultimately, there is no right or wrong answer when deciding how to distribute your life insurance death benefit. It simply depends on your personal preferences and circumstances. Be sure to talk to your life insurance agent to discuss your options to make the best decision for your loved ones.
Read more: Per Stirpes vs. Per Capita: What is the difference?
Setting Up a Trust
Setting up a trust for your life insurance death benefit can provide financial protection and guidance for your beneficiary. The trust, managed by a trustee, will determine when and how the beneficiary can access the funds.
Various types of trusts can be used for life insurance proceeds, such as irrevocable life insurance or a special needs trust. It is advisable to work with a qualified attorney to set up the trust and ensure it meets your needs and complies with legal requirements.
Aside from providing financial protection, setting up a trust can also help mitigate taxes on the death benefit and maintain privacy for your beneficiary.
However, remember that once you transfer ownership of the life insurance policy to the trust, you will only be able to make changes to it with the trustee’s approval.
When to Update, Change, Add or Remove Life Insurance Beneficiaries
You should review and update your life insurance beneficiary designation regularly. You also want to be aware of the reasons life insurance won’t pay out so you can avoid any surprises to your beneficiaries if something does happen.
It’s especially important when there are major life events, such as:
- Marriage
- Divorce
- The birth of a child
- Death of a beneficiary
If there are discrepancies between your beneficiary designation and your will, the beneficiary designation will take precedence. So, it is crucial to keep your beneficiary designation up to date with your current wishes.
In case of a divorce, find out if your state has any laws regarding the division of life insurance benefits. Some states may automatically remove a former spouse as a beneficiary, while in others, you will need to actively change the beneficiary designation.
If you need to change, add, or remove a beneficiary, it is typically a simple process that can be done through your life insurance company or agent. You can do your own research or read our article about the best life insurance companies.
Read more: How to Handle a Life Insurance Policy After a Divorce
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Case Studies: Choosing a Life Insurance Beneficiary
Case Study 1: Protecting Minor Children
Sarah and Mark are a married couple with two young children. They understand the importance of securing their children’s future in case of an unfortunate event. After consulting with their financial advisor, they decide to designate a trust as the primary beneficiary of their life insurance policies. (For more information, read our “How to Find a Life Insurance Advisor“).
The trust ensures that their children will receive the necessary financial support for their education and well-being until they come of age.
Case Study 2: Ensuring Financial Stability
John is a single individual with aging parents who depend on his financial support. He wants to make sure they are taken care of even after he’s gone. Considering their age and financial needs, John designates his parents as the primary beneficiaries of his life insurance policy.
He discusses his decision with them, ensuring they understand how to manage the funds responsibly.
Case Study 3: Supporting a Charitable Cause
Laura is passionate about a particular charitable cause and wants to continue supporting it even after her passing. She decides to name the charity as the primary beneficiary of her life insurance policy.
By doing so, Laura ensures that her financial contribution will have a lasting impact and support the cause she deeply cares about.
Case Study 4: Protecting Business Interests
Michael is a small business owner who wants to protect the future of his business and his family’s financial security. He decides to establish a buy-sell agreement funded by life insurance.
In the event of his death, the policy’s death benefit will be used to buy out his shares in the business, ensuring a smooth transition and financial stability for his family.
Frequently Asked Questions
Do I need a life insurance beneficiary?
Yes. Without a designated beneficiary, the death benefit will be paid to your estate. It may need to go through the probate process before being distributed according to your will. This process can result in delays and added expenses for your loved ones.
What happens if I don’t name a beneficiary?
If you don’t name a beneficiary, the life insurance company will distribute the payout according to their policies. In most cases, the money will go to the life insurance estate beneficiary. But if there’s no estate or insolvent estate, the money will go to the state.
It’s important to name a beneficiary because if you don’t, you can’t control who will receive the death benefit.
Can I change my beneficiary?
Yes, you can change your beneficiary. Review your beneficiary designation regularly and make changes as needed. You can do this through your life insurance company or agent.
Can I name a child as my life insurance beneficiary?
Yes. If you name a child as your beneficiary, the insurance company will pay out the policy proceeds to the child.
However, if you die while the child is still a minor, the money will be managed by a legal guardian until the child reaches adulthood.
So, before naming a child as your life insurance beneficiary, think about what is best for them and discuss it with your spouse or partner.
Is it wise to name my disabled or special-needs child as a beneficiary?
While some financial benefits to naming a disabled or special-needs child as a life insurance beneficiary, such as providing for their future care, there can also be negative consequences.
For example, if the parent or guardian dies, the child may become ineligible for certain government benefits, such as Social Security disability benefits.
Furthermore, the child may be subject to a spend-down requirement. Before the child can receive government benefits, they must use the inheritance to cover the cost of care.
As a result, parents or guardians should carefully consider all potential implications before naming a disabled or special-needs child as a beneficiary.
Your life insurance quotes are always free.
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Chris Abrams
Licensed Life Insurance Agent
Chris is the founder of Abrams Insurance Solutions and Marcan Insurance, which provide personal financial analysis and planning services for families and small businesses across the U.S. His companies represent nearly 100 of the top-rated insurance companies. Chris has been a licensed life and health insurance agent since 2009 and has active insurance licenses in all 50 U.S. states and D.C. Chr...
Licensed Life Insurance Agent
Editorial Guidelines: We are a free online resource for anyone interested in learning more about life insurance. Our goal is to be an objective, third-party resource for everything life insurance-related. We update our site regularly, and all content is reviewed by life insurance experts.